MNI INTERVIEW: Fed To Cut Gradually If Growth Solid - Giannoni

MNI (WASHINGTON) - The Federal Reserve will move slightly faster to get policy closer to neutral after a disappointing July jobs report, but the U.S. economy is in all likelihood still going strong, which calls for a gradual Fed easing cycle, former Dallas Fed research director Marc Giannoni told MNI.   

He now expects three consecutive quarter-point cuts to end the year, one more than before the jobs report showed unemployment jumping two-tenths last month to a three-year high of 4.3%, followed by three more quarter point cuts spread through 2025. Unless data show the macro picture has suddenly shifted, a more aggressive 50-basis-point cut would not be warranted, said Giannoni, now chief U.S. economist for Barclays. 

"The fundamentals haven’t really changed – we still see solid demand growth in the third quarter. But the rise in the unemployment rate is going to make the Fed somewhat nervous and provide more evidence that the labor market has come into balance. That will make them want to quickly adjust rates now and be 75 bps lower by the end of the year," he said. 

"But next year, inflation may still be not quite at 2% and the labor market will have not necessarily deteriorated a lot more than it has. So the Fed will continue to cut but do it quite slowly." 

SUPPLY EFFECTS

The burst in U.S. immigration over the past couple years continues to boost labor supply and is set to drive the unemployment rate to 4.4% at year-end, two-tenths higher than the FOMC had expected in its June projections, Giannoni said. The labor force rose by 420,000 last month while the number of employed persons increased by just 67,000, the Bureau of Labor Statistics said Friday. 

In addition, some of the weakness in hiring may be attributable to Hurricane Beryl, which hit Texas and a few other states during the reference week for the BLS surveys, despite the BLS noting weather had no effect on the data, Giannoni said. The establishment survey reported a 114,000 payrolls gain versus market expectations of around 170,000. 

"I suspect the next labor report will be particularly informative. If something happened in July that changed macro conditions, expect the unemployment rate to shoot up again by 20 to 30 bps. If we see that, it’ll be a very different world and would warrant much more aggressive moves," Giannoni said. "There’s some probability of that, but that’s not my baseline." (See: MNI INTERVIEW: Fed Well Placed For Sept Rate Cut- Weinberg)

GLIDE PATH

Instead, he expects the August jobs report to show some improvement, with the unemployment rate steady and payrolls rebounding slightly. (See: MNI INTERVIEW: No Alarm Bells Yet In July US Unemployment Jump)

Consumer fundamentals have stayed resilient, underpinned by strong income growth and high household net worth, Giannoni noted. GDP grew at a robust 2.8% pace last quarter while private domestic final purchases, a measure of underlying demand cited by Fed Chair Jerome Powell, grew at a 2.6% pace in the first half. 

"Next year, with immigration flows slowing significantly, the unemployment rate could drift back down. And depending on who's in the White House, we may see severe limits to immigration upside risks to inflation," he said. 

Fed officials want to deliver a glide path to a soft landing for the U.S. economy, he said. If inflation stalls at 2.5%, they can easily pause. 

"As they get to their objectives, you’d expect them to normalize. But that doesn’t call for a very rapid normalization, especially if they're not convinced inflation will continue to diminish and get close to 2% anytime soon."